Interactive Investor

Stock of the week: Weir is easy target

6th March 2015 16:59

Harriet Mann from interactive investor

The M&A rumour mill went into overdrive on Friday as speculation did the rounds that a cash-rich American private equity firm is preparing to make an offer for perennial takeover favourite Weir. A 5% rally helped the engineer, which supplies parts to miners, oil companies and frackers, finish the week 8% higher than Monday morning. But, the view is it's a price a potential acquirer might find palatable.

Weir hasn't been immune to the turning commodities tide and has lost about 35% of its market value since the summer when oil prices began to tumble. The industry downturn is expected to hit the group hard, and in full-year results published last week, Weir warned that a "significant reduction" was expected in 2015 revenue and operating margin.

Investec took the hint, shrinking its earnings per share (EPS) guidance by 16% to 104.9p and downgrading its target price to 1,525p, despite a wider sector re-rating. At 1,822p and trading on 17 times forward earnings, Weir is still not that cheap for a private investor, but is certainly a better buy for a possible acquirer and will be on someone's radar.

"The prospect of someone seeing value at this level cannot be ruled out - after all, this industry isn't facing extinction, it's just we're seeing a levelling of supply and demand removing the toppy prices," Tony Cross, an analyst at Trustnet Direct, said in a note.

True, the worst is yet to come for the majority of oil players as the era of depressed prices continues. But there is a long-term investment case for the services group thanks to its growing minerals installed base and structural growth from unconventional drilling, reckons Investec. But analyst Thomas Rands remains cautious of on-going earnings risk and Weir's reliance on debt for funding.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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